So you have your awesome idea and you want to get your startup off the ground. Or, you ‘ve been at it for a couple years and you feel like you need a boost to expand.
An investor crosses your path, they’ve been watching you and are excited about your journey and they’d like to come along and bring something to the table while they’re at it. Do you accept this new member to your party? Or, should you pass on the opportunity and get bootstrapping?
Types of Business Funding
What is Bootstrapping?
Bootstrapping or Bootstrap Funding is something most startups and small businesses have experienced at one point or another, consciously or not.
The baseline of bootstrapping is bringing in little to no outside investments. Your budgeting practices will be more centered around making cuts and setting up for positive cash flow. If some part of your operation isn’t of vital importance, and it’s costing you money you don’t have: the cost should probably get cut. At least until you can support the cost with new income.
Bootstrapping forces you to be as responsible with your finances as you possibly can be. A dedicated bootstrapping practice means cutting costs, finding new income streams and not taking on investors. It’s very difficult, especially if you don’t have any sort of professional support. However, it does guarantee you are the one making the big decisions without a stakeholder’s permission.
Investment funding comes in different forms and they are all completely different from bootstrapping. When choosing this path, you now have an investor. Someone who has given your business money in exchange for a piece of ownership in the company. Below are some of the more popular options.
An angel investor usually comes in the form of a highly successful business person using personal money. These types of investors usually handpick their recipients after careful review.
Angel investors will also be around to share experience and help you make decisions to better grow your company (and their investment). It’s also worth noting angel investors typically expect up to 30% ownership in the company they invest in.
If you’re completely prepared, these are great investors to catch the eye of.
Venture Capital Investors
With venture capital, you can get a very fast start with the increased legitimacy of a huge corporation supporting you. However, with this option usually comes the most loss of control. Venture capital investors will also want stake in your company and their decision-making can run very deep into the operation.
If you aren’t too worried about giving up control to a larger entity, this can be a great option. You’ll get a monetary supply as well as the experience of people already successful in the business world.
Crowdfunding is a fairly new option to startups and businesses. This method revolves around getting a social buzz, with a message, promoting your business or product. There are several platforms but sites like Kickstarter and GoFundMe are a couple of the most popular.
Crowdfunding could almost be categorized as a form of bootstrapping. You’re given a platform for your message where you have the chance to clearly show the world what you need help funding. If people are interested in the product or service you want to bring to the table (and you have some good incentives for contributing), they have the option to fund your project! You won’t get professional insights, but, you also won’t have someone telling you what to do.
When it comes to repaying the investment, you can get creative. Some companies will offer coupons to people who contribute smaller amounts all the way up to getting the new product itself and getting early in exchange for larger contributions.
Investors vs Bootstrap Things to Consider
When you bootstrap, you’re really just practicing fiscal responsibility. Unless you have shareholders or employees, bootstrapping won’t require you to answer to anyone else. You still hold the keys to your operation.
With investors comes advice and changes to be made. Or, even having someone taking considerable stake in your company. You then have an entity, person or institution, holding you accountable. While having the experience and guidance of ultra-successful people comes with it’s share of wonderful advantages; if business takes a down-turn, you have a new host of unhappy faces to answer to.
But, a strong, professional support structure could be the difference between smashing a goal or just coasting along a plateau. Before running to that angel investor, realize that LDI has the training, resources, and a support network that doesn’t require stake in your company.